Two recent decisions of the Court of Reggio Emilia (18 December 2014) and of the Court of Palermo (13 October 2014) followed the Supreme Court’s case law according to which companies  held  by  public agencies can be declared bankrupt, even in case they provide “in house” services mainly to shareholders

The cases

The  Public  Prosecutor  of  the  Court  of  Palermo asked  for  the  declaration  of  bankruptcy  of  a  company operating in the sector of waste integrated management, in liquidation and insolvent.

The debtor objected that it could not be declared bankrupt, since it should have been considered as a “public entity” and, as such, benefit from the exemption from bankruptcy pursuant to artt. 1 IBL and 2221 ICC.

The  Court  of  Reggio  Emilia  ruled  on  a  bankruptcy  filing  made  by  the  same  debtor,  being  a  real  estate management company devoted to protect historic and artistic property in the area.

The issue

The Courts faced the following question: whether companies held by public agencies – and, in particular, those providing “in house” services – can be exempted from bankruptcy as “public entities”.

According  to  case  law,  “in house”  providing  companies  should  meet  three  requisites:  a.  being  held  by shareholders having a public nature; b. provide services predominantly in favour of the same shareholders; c. being subject to a control corresponding to that exercised by public entities over  their  offices.  These requisites (which must strictly ascertained on a case-by-case basis) must (i) jointly exist and (ii) arise from specific and binding provisions of the by-laws.

The decisions

The two Courts gave a negative answer to the question:

  • pointing out that, although being qualified as “in house” companies has an influence on jurisdiction for liability claims against the corporate bodies for damages caused to the company’s assets, this is limited to such a specific issue;
  • underlining also that (based on a precedent of the Court of Modena of 10 January 2014) “in house”

company remain subject to bankruptcy if they do not strictly meet all criteria to be so qualified.

The Court of Palermo – pointing out that the burden of the proof regarding the qualification of the company as “in house” is on the debtor – noted that the external control criterion was not met.

The Court of Reggio Emilia noted that ordinary real estate management services do not qualify as public services.

The comment

Art. 2221 ICC and Art. 1 IBL exempt “public entities” from bankruptcy, but do not exclude bankruptcy declaration of companies – although held by public agencies – actually carrying out a business.

Despite this, a significant part of case law (among others:  Court  of  Naples,  31  October  2012;  Court  of Naples, 24 October 2012; Court of Appeals of Genova, 2 February 2012; Court of Catania, 26 March 2010; Court  of  Appeals  of  Turin,  15  February  2010;  Court  of  Santa  Maria  Capua  Vetere,  22  July  2009  and 9 January 2009) recently ruled that said companies – under certain conditions – could also be qualified as “public entities” and, therefore, benefit of the exemption from bankruptcy.

This was based on the principle of prevalence of “substance” over “form”: the carrying out of an essential public services should meet the test of “public entity”, prevailing over the form of a business organization. This interpretation is challenged by another part of case law (Court of Appeals of Naples, 27 May 2013, 24 April  2013  and  15  July  2009)  and  also  by  the  Supreme  Court  of  Cassation  (27  September  2013, No. 22209).

The  ruling  of  the  Court  of  Cassation  is  based  on  various  grounds,  among  which:  (i)  the  principle  of prevalence of substance over form is in contrast with the general rule of Art. 4 of law No. 70/1975, according to  which  “any  new  public  entity  can  be  incorporated  or  acknowledged  only  by  operation  of  law”; (ii) companies providing essential public services are subject to the extraordinary administration procedure of large corporations, under specific provisions intended to ensure continuity of services: a system exempting from bankruptcy such entities but not from extraordinary administration would be unsound.

The foregoing must however be considered in light of recent case law (among the others: Court of Nola, 30 January 2014; Court of Naples, 9 January 2014; Court of Verona, 19 December 2013), according to which that specific category of “in house” companies should be exempted from bankruptcy.

This case law tries to coordinate with principles on jurisdiction for liability actions against corporate bodies of “in house” companies (Court of Cassation, 25 November 2013, No. 26283; Court of Cassation, 10 March 2014, No. 5491).

The Courts of Palermo and Reggio Emilia confirmed however that also “in  house”  companies  can  be declared bankrupt, if all required conditions for exemption are not strictly met, thus aligning with other precedents (such as Court of Modena, 10 January 2014, ruling on the admission to concordato preventivo).